More gloom points to rate cut

THE Bank of England may be forced to cut interest rates as soon as next week, experts said yesterday after it emerged that the economy is slumping more markedly than originally thought.

The pound took a dive following the news, dropping beneath $1.80 against the dollar for the first time in more than eight months.

The Office for National Statistics said the gross domestic product grew by 0.4pc in the first quarter of the year, rather than the 0.5pc it had estimated. It also said GDP grew 0.1% faster at 3.2% last year and 0.3% faster at 2.5% in 2003.

The changes, part of the ONS's annual revamp of the national accounts, show that the fall in economic growth is more pronounced than previously thought.

Economists said they are now expecting the economy to grow by 2.5% or less this year - well below Gordon Brown's 3%-3.5% forecast. Philip Shaw, chief economist at Investec, said Brown's target 'looked like a pipe dream'.

The City now expects the Monetary Policy Committee, chaired by Bank governor Mervyn King, to cut rates, now at 4.75%, to at least 4.5% by the end of the year.

Malcolm Barr, UK economist at JP Morgan, said that providing statistics released next week do not jump unexpectedly, the MPC may move immediately.

He said: 'A reduction in rates in August at the latest looks increasingly likely, and unless the PMI surveys bounce we would expect a move, albeit on a split vote, at the meeting next week.'

Sterling has plunged in recent weeks amid increasingly gloomy data about the economy. Last night it was over a cent weaker against the dollar at $1.7925.

The ONS data also showed the household savings ratio fell to 4.2% last year - the lowest level on record.

AMERICA'S central bank, the Federal Reserve, raised its key interest rate by another quarter-point last night. The action pushed the federal funds rate up to 3.25%, its highest level since September 2001. When the Fed started its credit tightening campaign a year ago, the funds rate had been at a 46-year low of 1%.